State finalizes new oil tax regulations

JUNEAU — The state has finalized rules to help determine what oil qualifies for special tax breaks under Alaska’s new oil tax law.

The law championed by Gov. Sean Parnell and passed by the Legislature earlier this year is aimed at spurring more production. Alaska relies heavily on oil revenues to run state government, but oil production has long been on a downward trend.

The law, much of which takes effect Jan. 1, sets a base tax rate of 35 percent and provides a capped, per-barrel credit that the Parnell administration expects will apply to the vast majority of the legacy fields.

It also provides more generous tax breaks for so-called “new” oil. How best to define new oil was a sticking point during the legislative session. Metering would be used to calculate one of the most contentious types of oil that qualifies for tax breaks: oil coming from acreage that’s added to existing producing reservoirs.

Companies seeking a tax break for this type of oil would be responsible for the metering. Mike Pawlowski, oil and gas program director for the state Revenue Department, said Monday that metering is a “very objective standard” that also provides transparency and predictability for the companies and the public.

An earlier proposal also would have allowed companies to use an alternative methodology, but he said that left more discretion up to the department to decide what qualifies.

Separate meters would not be required for each well. Audit master John Larsen said the state would prefer companies aggregate wells from the expanded acreage and run them through a single meter for efficiency’s sake.

Rep. Beth Kerttula, D-Juneau, worries the regulations could create a loophole that could allow oil from existing pools to get a better tax rate.

According to the regulations, companies must show their plans have not been designed to cause wells in expansion areas to drain oil from an existing area if the oil could be extracted more efficiently by wells in the pre-expansion area. Kerttula said that provision is problematic if it means it’s OK to produce oil from existing pools using new wells that qualify for tax breaks as long as it’s more efficient.

Pawlowski said the provision actually is intended to protect the state and prevent drainage.

“It’s theoretically possible to push oil to the new wells, but the cost and the time of it is incredibly inefficient,” he said. The way the law was written, he said the state was willing to accept some drainage to new wells, but this provision in the regulations allows the state to take action if companies change their development plans specifically to cause drainage.

The regulations were released last week. Kara Moriarty, executive director of the Alaska Oil and Gas Association, said by email that her group was still reviewing them to see if they addressed all the association’s concerns.

Alaskans will get to vote next summer on whether to repeal the oil tax law in a referendum.

Kerttula, a critic of the new law, said she doesn’t expect the Legislature to address any lingering concerns with the tax overhaul during the upcoming session, which begins in January. “I think this is going to have to be a vote of the people to change this whole situation,” she said.